From Senator Frank Walker, Chief Minister.
ON 31 October the JEP published a letter from John Davis entitled ‘I was right last time on GST; I hope that I am not right again’.
I have responded to Mr Davis and roundly refuted his suggestion that he did not receive a reply to his previous letter.
The previous response to Mr Davis from the Chief Minister on 18 February 2008 was signed on behalf of the Treasury and Resources and Economic Development Ministers, who contributed to the letter and were in full agreement with its content. It is therefore incorrect of Mr Davis to say that he had not had a reply from those ministers and extremely disappointing that he made such misleading claims in the letter published in the JEP on 31 October.
In our response to him we made it clear that GST would add just below 2% to RPI in June 2008 and that it would drop out of the inflation figures in June 2009. He was incorrect to state in his previous letter that GST itself would add 1.9% to inflation in 2008 and a further 1.1% in 2009, and he was incorrect to repeat this. The impact will be to add 1.9% to inflation as measured by the change in RPI in June 2008, September 2008, December 2008 and March 2009, before dropping out of the index in the subsequent quarters of 2009.
We believe that this mistake in interpreting the impact of GST leads Mr Davis to overestimate the trends in inflation in Jersey next year. The trends suggest that inflation should start to fall back next year. The dramatic cut in interest rates by the Bank of England (from 4.5% to 3.0%), if passed on in mortgage rates, will have the immediate effect of significantly reducing inflation as measured by the RPI in the fourth quarter of 2008 and most of 2009.
Of course we must also bear in mind that the reason the Bank took such action is that they feel that the risks of a prolonged downturn in the UK are significant, and this does not bode well for the Jersey economy. However, from an inflation perspective, to quote the bank: ‘In recent weeks, the risks to inflation have shifted decisively to the downside.’
In the previous letter to Mr Davis we also pointed out that he had inaccurately described Jersey’s inflation performance as being persistently higher than that in the UK in recent years. We made it clear to him that this was not true when comparing like-for-like figures over the previous two to three years. When you compare underlying inflation in Jersey and the UK (as measured by RPIY), Jersey inflation, at 4.9%, is 0.7 percentage points below the 5.6% in the UK.
We agree that the key threat to inflation is the response to the recent rise in inflation from Islanders in terms of their wage demands. If we do enter a wage-price spiral, that will not be the fault of GST (which as a tax taking the money out of the economy is deflationary) but as a result of wage increases that exceed productivity improvements.
Cyril Le Marquand House,